What is the main difference between 'risk' and 'uncertainty'?

The main difference between 'risk' and 'uncertainty' lies in the nature of their probabilities and how potential outcomes are assessed. When we refer to risk, we are typically discussing scenarios where the probabilities of different outcomes are known or can be estimated based on historical data. This enables individuals or organizations to make informed decisions based on the likelihood of various events occurring, such as the chance of a financial investment yielding a certain return.

In contrast, uncertainty describes situations where the probabilities of outcomes are unknown or cannot be measured accurately. This means that the future states are unpredictable, making it challenging to make decisions based on statistical analysis or previous experience.

Understanding this distinction is crucial in risk management, as managing risk involves developing strategies to mitigate or accept known risks, while dealing with uncertainty often requires a different approach due to the lack of clear probabilities or data to guide decision-making.